Seeking Alpha • Aug 10
A Negative EV Opportunity - Sera Prognostics Has A Chance To Become Standard Of Care In Preterm Birth Risk Screening
SERA sells PreTRM®, a CLIA-lab based assay to determine the risk of a woman having a pre-term birth – a birth prior to 37 weeks of gestation.
After IPO'ing in July 2021 at $16, the Company has since lost over 80% of its value and trades at 50% of its cash and marketable securities.
PRIME, a post-marketing study, is being run with Elevance Health, who is also an investor. A positive outcome could make PreTRM® the standard of care.
At their current burn rate, assuming their interim data in mid-2023, SERA should have over $2 per share in cash in July 2023, which reduces the downside risk.
SERA Prognostics - Overview
Sera Prognostics (SERA, or the Company), a Salt Lake City, Utah diagnostics company trading on the NASDAQ, sells PreTRM®, a test that provides physicians an assessment of the individualized risk of premature delivery in a pregnancy. A determination of high-risk enables physicians to increase their monitoring and proactive interventions in those women with higher risk.
The test is based on a proprietary predictive algorithm of the serum level of two proteins, insulin-like growth factor-binding protein 4 (IBP4) and sex hormone-binding globulin (SHBG), coupled with clinical variables consisting of a woman’s height and weight. The initial algorithm output was reported from the Proteomic Assessment of Preterm Risk ((PAPR)) study, a study of serum from 5,501 patients published in February 2016.
The Company ran a second clinical validation study, A MulTicenteR AssEssmEnt of a SponTaneOus Preterm Birth Predictor (TREETOP). The TREETOP study enrolled 5,011 pregnant women from 18 sites across the United States from 2016 to 2019.
TREETOP Study Report
Figure 1: Kaplan–Meier curve of neonatal length of stay in days for all neonates, stratified into higher- (gold) and lower-risk (blue) groups as defined by the SERA algorithm. ((A)) Data from the PAPR study. ((B)) Data from the TREETOP study. Source – TREETOP publication.
With the biomarkers discovered and validated in PAPR the Company ran an intervention study to determine whether risk stratification and interventions in the higher PreTRM®-risk pregnancies had an impact on the preterm birth rate, on neonatal length of stay and on the costs associated with the preterm birth. The Company worked with the Intermountain Health System, based on Salt Lake City, UT, to determine if the PreTRM® test could reduce the likelihood of a spontaneous preterm birth (sPTB) and associated costs. The PREVENT-PTB study enrolled 1,191 women. The study was not powered to analyze a decrease in preterm births, but, importantly, showed a substantial decrease in the number of days preterm infants spent in the neonatal intensive care unit (NICU), despite the study being stopped well short of its original enrollment goal because of funding shortfalls.
PREVENT-PTM Study Report
Figure 2: Kaplan–Meier survival curves comparing length of neonatal intensive care unit stay (days) among screened (red line) and unscreened (blue line) groups. Source: PREVENT-PTM Study Report.,
The NICU length of stay (LOS) was not the initial primary endpoint, but was recognized as an important pre-specified endpoint of clinical and economic importance among infants admitted for sPTB. The study demonstrated a difference between the control and study groups, with a LOS in screened patients median of 6.8 days, and a LOS in unscreened patients a median of 45.5 days. This is an 85% reduction between the screened and unscreened patients.
The substantial decrease in the number of NICU days, despite the small trial size, allowed SERA to garner substantial investor interest and raise substantial additional capital. Included in the new book of investors was Anthem (now Elevance Health (ELV), who owned ~10% of SERA at the time of the July 2021 IPO). Elevance entered a commercial agreement with SERA to purchase a minimum number of tests over multiple years (details were redacted in the agreement filed with the SEC). Elevance and SERA also partnered to initiate a 6,500 patient post-marketing study throughout the Elevance network of hospitals. The PRIME Study is currently enrolling patients in 13 sites around the country, and is expected to enroll 2,800 patients by the end of 2022. Management has stated that they intend to provide an interim data readout on those 2,800 patients around mid-2023.
Elevance and SERA worked with HealthCore, the Elevance analytics subsidiary, to predict the economic effects of adjusting the monitoring and proactive interventions based on Sera’s PreTRM screening test by analyzing more than 40,000 commercially insured pregnancies. The model published in the journal ClinicoEconomics and Outcomes Research predicts a reduction in the number of NICU days by 20%, and a gross cost savings was calculated to be $1,608 per pregnant patient, not including the assumed cost of $745 for running the test. (Source: SERA Corporate Presentation, CEOR publication)
The Company IPO’d in July 2021 at stock price of $16. Prior to the IPO, the Company did a $100 million private placement. The Company currently has a small sales force working to sell the PreTRM® test focusing on health systems including self-insured employers, integrated delivery networks (like Kaiser Permanente), and managed Medicaid groups. In Q1 2022 revenue from tests was only $38,000, which caused some analyst angst. The Company has guided to have $500,000 of revenue for the full year 2022.
ldmicro.com
Source: LDMicro.com
As of March 31, 2022, the Company had approximately $130 million in cash and cash equivalents, and the Company had approximately 31 million common shares outstanding. There are another 11 million warrant and option shares outstanding. The options have a weighted average exercise price of $4.30.
The company burned $9.5 million in cash in operating activities in Q1 2022 but had fluctuations in liabilities and receivables. Adjusting for depreciation and stock option expensing, the net operating loss was approximately $11 million.
Assuming an $11 million cash operating loss in Q2 2022, the cash balance at the end of Q2 2022 is likely around $119 million – which is about $3.83 in cash, excluding the warrants and options, which are currently mostly out of the money.
Management Team
The CEO (Greg Critchfield), CFO (Jay Moyes), CSO (Jay Boniface) and General Counsel (Benjamin Jackson) were all at Myriad Genetics (MYGN), which launched one of the most successful CLIA laboratory diagnostics in history targeting the BRCA gene in women as a risk factor for breast cancer. Greg Critchfield lead Myriad Genetics from July 1998 through March 2010. During that time they completed the development of their breast cancer test, launched their test through the CLIA lab pathway, then developed a on-site kit that required FDA 510((K)) clearance. Stockholders were rewarded with as much as 17X, depending on their ability to perfectly time their sale.
Yahoo Finance
Source: Yahoo Finance
The CEO (joined SERA as a Director in Aug 2010 after leaving MYGN and took over as CEO in Nov 2011) and the CFO (joined SERA in March 2020, last full-time position was MYGN in Nov 2007) were on the Director lifestyle-path after a long, successful run at MYGN. They both have claimed that they have taken a pause on retirement to make SERA successful.
Discussions with management lead me to believe that they are cognizant and cautious about spending, which is the key to retaining value in the event of a Lose scenario.
The Opportunity – A Path to Becoming a New Standard of Care
There are approximately 3.6 million births in the US per year. Of those, approximately 10% were born preterm. According to the March of Dimes, the costs of preterm birth in the US was over $25 billion in 2016. The highest propensity was in African Americans at 14.2%, and the lowest propensity was in the Asian/Pacific Islander population at 8.8%.
The PreTRM® test is designed and marketed for women carrying a single baby, who are otherwise not deemed to be high risk. Having a previous preterm birth, genetic red flags, twins, or triplets are factors that would cause a physician to increase the monitoring and/or proactive interventions to help keep the baby in the womb as long as possible. If a physician is provided with the assessment that a woman potentially has a high risk pregnancy, there are multiple interventions that could be done to attempt to prevent a preterm birth:
Increase surveillance
Additional cervical length measurements
Progesterone injections
Low-dose aspirin
Antenatal steroid therapy
Below is a sample preterm birth risk assessment report that would be delivered to the physician.
SERA Prognistics 10-K
Source: SERA 10-Q
The PREVENT-PTM study showed a 70% reduction in the total NICU days for those patients who were screened, versus those that were not screened. In a discussion with management, they indicated that in the study, the notice of increased risk did not always translate into a physician using of one or more of the possible interventions. There was noise in the study, and the Company does not own the patient data so cannot do its own patient by patient analysis to understand the noise. Anecdotally, some patients who tested positive for the high risk screen rejected additional interventions, and added to the NICU days of the screened patients. Given the small size of the study, the focused geography of the enrolled patients, and the anecdotal noise, it is not surprising that the Company, and Elevance, are attempting to reproduce the study with a much larger sample size. If the PRIME study is able to reproduce the data with high statistical significance, then it is probable that the PreTRM® test becomes the standard of care. Additionally, the study should be able to provide further pharmacoeconomic data to determine the full value of providing the screening test.
The Company estimates that there are about 3 million potential patients that would qualify for PreTRM® testing, which is about 83% of US births. If PreTRM® becomes the standard of care, and the Company is then able to charge $500 per test, then the total addressable market in the US is $1.5 billion.
Ability to Decrease COGS
At present, the test involves gathering patient serum and running a processed sample through a mass spectrometer to obtain the protein levels required for PreTRM® assay. Serum collection and shipping requires a cold chain to maintain sample integrity. Sample preparation for mass spectrometry is a non-trivial task that requires labor input. The current COGS, as stated by the Company, is approximately $150 per sample.
As a first step, with higher sample volumes and the additional robotics to do the sample preparation process, the Company believes that hitting a $100 COGS is doable with the current process using a mass spectrometer.
Those skilled the art of protein characterization and measurement know that the Company can take some additional research steps to dramatically reduce the COGS. A simple sandwich ELISA (enzyme-linked immunosorbent assay) would dramatically reduce the costs to run the assay. The Company would need to make two different antibodies to bind to two different areas of the protein Each gram of antibody will cost $200-500 once designed, but each test would require only micrograms of antibody, depending on the size of the testing well. One antibody would bind the protein to the substrate at the bottom of the well, and one antibody would bind the signaling marker to the other side of the protein to be scanned by a reader. This process is highly standardized in the industry and would allow the Company to fully automate the testing process and use 96 or 384 well plate.
TRG Biosciences
Source: Image from TRG Biosciences Website
SERA Valuation Scenarios
“Win” Scenario
Given that Elevance has invested in the Company and helped craft the PRIME study, one can assume that the success or failure of the PRIME study would determine the level of adoption of the PreTRM® test by Elevance’s insured network (~400,000 total births per year). That adoption level will then determine the success or failure of the SERA. If the PRIME study validates the cost savings from providing the assessment of preterm birth risk, then Elevance (as well as any other insurance company) would do the math and adopt the screening test as a standard of care. In that “Win” scenario, I would assume the following for the model:
a 50% ultimate penetration, with 20% quarterly growth starting in 2024 (probably conservative given that Elevance would roll-out day one and insure approximately 400,000 births per year)
a price point of $300 until data in 2023, then $400 once the data is able to validate the economics
Modest increase in sales and marketing expenses upon positive interim PRIME data
50% COGS until 2024, 25% COGS from improved automation and increased scale using the current mass spectrometry methods
Only modeling US market – the EU and Asia would require a different business model which is not currently detailed by the Company
These “Win” scenario assumptions generate a proforma NPV of $734 million, or $19.90 per share on a fully-diluted basis including cash at the of 2022. There are 41.8 million shares, warrants and options outstanding as of March 31, 2022.
Internal Analysis
Source: Internal Analysis
If the Company is able to reduce the COGS to $20 using a different protein measurement technology, then the proforma NPV of the Win scenario at the end of 2024 would be approximately $300 million higher, which is approximately $7 per share in incremental value.
“Gray” Scenario
If the study is not 100% clear, the cause will likely be driven by patient/doctor compliance with appropriate interventions following notice of high-risk. In that case, there will still likely be a strong case for performing the test in certain patient demographics, or certain geographies. Elevance’s actuarial tables determined that a 20% reduction in NICU days would result in $1,600 of savings if all patients were given the test. The PRIME study is large enough to enable the Company and Elevance to dissect the data and determine where the test can be profitably used, in the event the results do not clear the 20% hurdle across the broad population. In the “Gray” scenario, I would assume the following for the model:
a 20% ultimate penetration
a price point of $300 until data in 2023, then $350 once the data is able to validate the economics
no increase in sales and marketing expenses upon positive interim PRIME data
decrease in ongoing research and development expenses
50% COGS until 2024, 30% COGS until 2025, 25% COGS thereafter from improved automation and increased scale
Only modeling US market – the EU and Asia would require a different business model which is not currently detailed by the Company
These “Gray” scenario assumptions generate a proforma NPV of $158 million, or $6.10 on a fully-diluted basis including cash at the end of 2022.
Internal Analysis
Source: Internal Analysis
“Lose” Scenario
If the study is a failure, then the Company is likely dead. The Company would need to wind down operations and would become a reverse merger candidate or give the money back to investors (wouldn’t that be refreshingly crazy!). In the “Lose” scenario, I would assume the following for the model:
No business past Q2 2023
The Company winds down operations in the second half of 2023
The Company becomes a reverse merger candidate and trades for unspent cash.
These “Lose” scenario assumptions generate an NPV of $0, but the company would still have approximately $72 million, or $2.35 in cash per common share, at the end of 2024. There are 30.8 million common shares. The outstanding warrants and options would be substantially below basis therefore not included in the calculation.
Overall, if one assigns probabilities to the different scenarios, one could calculate a range of stock prices that would make sense – all of which are above the current stock price.
Internal Analysis
Financing Risk